KEMET's (KEM) CEO Per-Olof Loof on Q3 2016 Results - Earnings Call Transcript

| About: Kemet Corporation (KEM)

KEMET Corporation (NYSE:KEM)

Q3 2016 Results Earnings Conference Call

January 28, 2016 9:00 a.m. ET

Executives

Per-Olof Loof - Chief Executive Officer

Richard Vatinelle - Vice President & Treasurer

Bill Lowe - Executive Vice President & Chief Financial Officer

Analysts

Matthew Sheerin - Stifel Nicolaus

Marco Rodriguez - Stonegate Capital

Scott Russian - Liberty Mutual

Jacob Muller - AYM Capital

Ana Goshko - Bank of America Merrill Lynch

Operator

Good morning. My name is Melissa and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the KEMET Reports Preliminary Third Quarter and Fiscal year 2016 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Richard Vatinelle, Vice President & Treasurer. Please go ahead, sir.

Richard Vatinelle

Thank you, Melissa and good morning everyone. Welcome to KEMET’s conference call to discuss the financial results for the third quarter of fiscal year 2016 ending December 31. Joining me today on the call today is Per Loof, our Chief Executive Officer, and Bill Lowe, Executive Vice President & Chief Financial Officer.

As a reminder to you, a presentation is available on the Web site that should help you follow along in the financial portion of our presentation.

And before we begin, we would like to advise you that all statements addressing expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, plans, intends, projects and indicates. Although they reflect our current expectations, these statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks, 10-Qs and registration filing statements for additional information on those risks and uncertainties.

Now, I will turn the call over to Per.

Per-Olof Loof

Thank you, Richard and good morning everyone. The inventory correction in our distribution channel that we have been talking about now for several quarters continued this quarter. This led to a soft revenue quarter for us. We were a few million off our forecasted range but we were able to hold adjusted gross margins at 22.2% and our revenue for the quarter was $177.1 million, down 4.8% or $9 million compared to Q2.

Our adjusted EBITDA, however, only decrease $900,000. Additional efficiency program that we have been implementing over some time now also helped. Our non-GAAP EPS came in at $0.04 per fully diluted share. Our OEM channel is up 2% points of our total revenue. On a dollar basis it was flat quarter-over-quarter. EMS sales were down slightly. However, the distribution channel continued to stock below POS levels.

In Q3 of last year the disti business was 43% of revenue, this quarter it was only 40% for us. There is good news however. We do believe that we are at the end of this de-stocking process. We can already it in this quarter's bookings which are up 20% to date compared with the same date last quarter. Some of this you can explain by Asian customers ordering early due to the upcoming Chinese new year celebrations but it doesn’t explain the extent of the order growth we are now seeing.

This past quarter ending December should mark the low point in revenue for us. Over the course of the first three quarters this fiscal year, the inventory correction effect for KEMET was approximately $13 million with a corresponding drop in the market or run rate of POS of another $10 million at the distributor level. The OEM and EMS markets have also seen some fall back but for us and combined we managed to hold our revenue relatively flat over the last couple of quarters. Generally on a year-over-year basis reviewing 40 or so of our top customers, we find our revenues down across the board and depending upon the segment, the range is from 11% to 20%.

Our data would say that we have held if not increased our share. And with our current cost base, we are well positioned to take advantage of our cost position and be able to create additional bottom line value even if the markets do not return as we do expect. And as the markets return of course, it's another story altogether. We are now nearing the end of a very lengthy cost down process but we haven't seen all of it hit the bottom line as yet. But it is coming. And also from a working capital perspective, we will now be able to manage with less inventory since the buffer stocks we have been holding for major customers will soon no longer be required.

Comparing our revenue performance to Q3 of last year which was at $201 million, we are down $24 million. $5.7 million is due to FX and $16 million is less revenue in our disti channel. With those comments in mind, our revenue expectation for the March quarter unless the distribution channel does not recover a bit as we do believe, it is in the range of $180 million to $185 million. Based on this revenue expectation and further cost downs making their way to our P&L, we expect the margins should increase 50 to 100 basis points.

I will now turn it over to Bill to go through the numbers and come back to you later with some additional color on the markets and the business units. Bill?

Bill Lowe

Thank you, Per. And I will begin my review on Slide 3, if you are following along on the Web site.

As Per said, net sales were $177.2 million which were down 4.8% compared to the prior quarter of $186.1 million. The GAAP gross margin percentage was lower by approximately 110 basis points from 23% to 21.9% and our GAAP net income was negative $8.6 million or $0.19 per basic and diluted share compared to a net income of $7.2 million or $0.16 per basic and $0.14 per diluted share for the prior quarter of September 30, 2015.

Moving to Slide 4. Our non-GAAP gross margin percentage, as Per again said earlier, decreased also by 110 basis points to 22.2% compared to 23.3% in the prior quarter. Our non-GAAP adjusted net income was $0.05 per basic and $0.04 per diluted share and adjusted EBITDA for the quarter was $23.5 million, down just slightly from $24.4 million in the prior quarter. Non-GAAP SG&A expenses of $19.8 million improved compared to the $21.1 million in the prior quarter of September. And our expectation for this next quarter in March is in the range of $21.5 million to $22.5 million for SG&A.

If I skip forward to Slide 7, capital expenditures during the quarter were $4.9 million and year-to-date we spend $14.1 million with a forecast now for the full year in the range of $18 million to $21 million. We did grow cash in the third quarter by $5.8 million and our total cash in the bank at December 31, 2015 was $45 million. We continue to expect to build cash in the fourth quarter and as I have said on our prior calls we should end up with an amount similar to where we started this current fiscal year.

Regarding the performance of NEC TOKIN, revenue in the third quarter came in at [135.4 yen] [ph] or approximately $111.6 million. Our share of their financial results for the quarter was an equity loss of $6.5 million. Their cash balance remains healthy at approximately $103 million and EBITDA for the quarter in U.S. dollars was $14.6 million. NEC TOKIN did accrue an additional $20 million this quarter for the jurisdictions investigating the antitrust violations. Included in the net loss from equity affiliates this quarter is KEMET's 34% share of that impact.

Many of you have also seen the press release of the Taiwanese announcement of their assessment. It is our understanding that the Taiwan fair trade commission has indicated that the fine will be reduced and halved to roughly $18 million. The accrual this quarter includes the impact of that revised Taiwanese fine and an estimation of the remaining jurisdictions. These estimates are based upon the information provided to the company by counsel and the actual amounts could differ.

Now I will turn the cal back over to Per to discuss a few of the markets and our business units.

Per-Olof Loof

Thanks, Bill. First, let's have a look at our performance by market segment. This information can be found on Slide 8 of the web slides. On a percentage of revenue basis, the telecommunications is up one percentage point at 21%, defense and medical are up 2 at 14%, computer and consumer flat at 14% and 8% respectively, automotive down 1 at 21% and industrial sliding down 2 percentage points to 22%.

Turning to our business groups. In the solid capacitor group, revenue versus the prior quarter was down $6 million or 4.2% at $135.3 million. The decrease in revenue in Q3 was focused in our distribution channel as inventories continued to correct as we have spoken about before. Revenue in the OEM and EMS channel was essentially flat quarter-over-quarter and adjusted gross margin for Q3 was 27.6%, down 0.7% versus the previous quarter.

Continued progress in our cost and mix initiatives has effectively stabilized margins at the lower revenue levels. Moving into Q4, order rates and backlog are improving as I said and particularly in the distribution channel. This is an indication that the period of inventory correction is, as I have said, behind us. Our film and electrolytic business revenue was $41.9 million compared to $44.8 million last quarter, a decline of $2.9 million. Current quarter revenue was impacted by reduced demand in Europe while Asia and America increased. In Europe, many of our alternative energy customers have been effected by lower demand associated with continued low petroleum pricing.

Given this lower demand many were focused on working capital by reducing inventory as they closed their fiscal years. However, design activity in this segment remains very strong. Adjusted gross margins for this business group was down versus the previous quarter to 5% versus 7.6%, mainly driven by the reduced revenue level. And now to the regions. We finished our last quarter in Europe with $52.5 million which was down 11.8% versus last quarter.

The revenue at OEM customers were lower due to the scheduled Christmas holidays at the end of December. We also saw inventory correction within the channel continuing. However, POS within our channel increased by approximately 3% versus last quarter. We finished our overall quarter with a positive book to bill rate. In the Asia Pacific region revenue was flat at $68.4 million in Q3. POS sales was also slightly down by 2% due to one week national holiday in China. Similarly the last few quarters have been very challenging for Asia, particularly for China as economic indicators show signs of slowing down.

China's GDP growth in 2015 were 6.9%, the first time below 7% in two decades. However, despite the turmoil we hear about China and its markets, we are still positive on a long-term basis about the Asian market. Q3 revenue in the Americas finished down over the prior quarter of $58.1 million, ending at $56.4 million. POS declined quarter-over-quarter due to slowing of the overall business and the holidays. We expect POS to return to more normal levels this quarter. The book to bill rate is positive. Distributed POS in the EMEA region was up this quarter, Asia was flat and the Americas region was essentially lower. Over distribution revenue was down 6.5% or $4.9 million while POS down 4.2% compared to last quarter.

To sum it up, distribution channel inventory correction we believe is over. Margins holding or slightly increasing and a cost structure that sets the stage for continued profit. Next quarter sales in the range of $180 million to $185 million with slight margin improvement will keep us on a non-GAAP profitable course for Q4. With that being the case, we will have been profitable on a non-GAAP basis for each quarter this fiscal year. We are well positioned in our cost structure to take advantage of an upturn in the market and as our customers and end markets increases KEMET will leverage those revenue dollars to both cash flow and earnings per share.

Finally looking at this year, one can see plenty of headwinds. However, I do believe that the global economy will be better than what the pundits are expecting. The real economy here at home is doing well. I believe Europe will recover and the slowdown in China will be moderate. If I were just to offer a few areas in the economy where I am long, it would be the cloud. Everything connected. Electrification of automobiles in the cities and public transport and clean energy. We have the technology that will allow us to play in these segments of the market and we are already seeing increasing design activity in all of these areas.

As always, thanks to our hardworking employees that continue to make the extra effort to improve our performance and enhance our customers experience. And this concludes our prepared comments and we will be happy to respond to any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Matthew Sheerin with Stifel.

Matthew Sheerin

Just a few questions. It sounds like up here on the guidance, were you saying $180 million to $185 million?

Bill Lowe

Yes.

Matthew Sheerin

Okay. So that's kind of flattish, but it sounds like you seem more positive in terms of orders. You said it sounds like book to bill is positive in all regions. You saw signs that disti inventory correction is played out, but you're guiding kind of flattish. So what am I missing here?

Per-Olof Loof

I am guiding up. I mean we did $177 million. So I am guiding up to where we ended this quarter. And...

Matthew Sheerin

Well, 180 -- okay, well, the low end of that is kind of flattish, and I would've expected. It just sounded maybe more cautious because it's still unclear whether that order pickup you've seen is related to, as you said, a build ahead of the Lunar New Year as opposed to real signs of strength.

Per-Olof Loof

But it is -- I can see what the Asian orders look like of course. And if I take that out, we still have a strong order book at this point. So I do believe that the markets, that the Q1 will be stronger and I am putting out maybe cautionary guidance here but I do think that we will see revenue growth in the quarter. We will see the distribution channel returning to more normalcy and we will also see the margins improving slightly.

Matthew Sheerin

Can you give us the book to bill numbers that you are talking about?

Per-Olof Loof

Well, the book to bill now of course since the bookings are very very strong right now. And I would say we are actually 21%, actually, if I were to be more precise, ahead of last quarter. So the book to bill is kind of very very high at this point. But I am discounting that a little bit because the bookings may come in little early. But I see continued activity, I see very strong design activity across the board and I feel better about our prospects in this quarter than I did in the past. So all these things I think are adding to a more optimistic view of where we see business going.

Matthew Sheerin

Okay. And the gross margin in the F&E business, it looked like it was under pressure again and it sounds like demand signs are maybe less positive in the capacitor business or the ceramic and tantalum. Could you talk about that and talk about when you can get to a breakeven number on an operating basis?

Per-Olof Loof

For?

Matthew Sheerin

For F&E.

Per-Olof Loof

Yes. I mean the segment is actually right at, maybe a couple 10,000-20,000 below breakeven. But we expect that that will, we will get to a breakeven position this quarter. I think we are seeing revenue growth in that segment and Europe actually is one of the areas where we are seeing revenue growth coming in. And you are going to see some of these activities that we have taken in the F&E space, have of course rolled into inventory. So as they rollout of inventory that will come and hit the bottom line as well.

Matthew Sheerin

Okay. And then Bill, on the accruals for the liability of TOKIN in terms of the antitrust issues going on. Above and beyond the liabilities that you know about already, Taiwan reduced number and then the U.S., what's left? So in terms of -- what do you expect in terms of future penalties and fines?

Bill Lowe

Well, I can't go into the detail on an individual basis but of course what's left if you look at what's been announced between the U.S. and Taiwan, of course we have the EU remains, Japan remains, China remains, Korea remains, Brazil and Singapore remain. And so the reserve estimate does take into account what the advisors are advising NEC TOKIN in regards to the potential liability associated with those jurisdictions that have not yet formally replied to the company. So they have taken that into account when they have looked at this entire process for reserves.

Matthew Sheerin

Okay. So the number is, what, about $15 million?

Bill Lowe

No. If you add -- we actually added $20 million to the reserve -- they added $20 million to their reserve this quarter. They added $30 million originally in March of last year. So that’s [indiscernible] in dollar terms is approximately $50 million.

Matthew Sheerin

Okay, so it leaves about $20 million, give or take. Okay. And then just lastly in terms of the net loss reported for NEC TOKIN. I know revenue is still challenged but it looked deeper than I thought. Does that have anything to do with any legal costs or any liabilities in terms of their cost structure due to all this litigation going on or is that...?

Bill Lowe

Certainly. You see this accrual of course of $20 million is included in their results for the quarter. So that’s a big piece. They also have continuing legal costs as well that has been in every quarter throughout the fiscal year.

Per-Olof Loof

Let me add some color to that Matt, this is Per. Operationally they continue to perform well but of course the legal expenses are very high as you can imagine. And of course the accrual is also substantial. So the underlying operational performance is still as we expected when we started the year. So that’s a bit of a good news in this whole spectacle if you like.

Operator

Your next question comes from Marco Rodriguez with Stonegate Capital.

Marco Rodriguez

I was wondering if maybe you could talk a little bit more about the distribution channel. If my memory serves me correctly a year now for some time this channel does not seem to have really kind of performed up to expectations. And you've talked here at length in your prepared remarks that you believe that the current inventory correction is over and you're still pretty positive in terms of the long term demand there from your customers. So I'm just trying to figure out as best you guys can tell, what's really going on in that channel to cause this kind of longer term underperformance, given particular expectations you may have had there? And given all these apparent fits and starts, what might you be looking at to kind of change, or is there anything you can do to change to kind of insulate yourself a little bit better from these types of issues?

Per-Olof Loof

Well, let me start, try to answer that. We have seen an inventory correction. Now what that actually means is that their POS sales are actually performing better than what we were able to stock into the channel. So they haven't been stocking at what we would call POS levels. But as the business now starts to stabilize and actually we believe the POS is heading in the right direction for this quarter, that these stocking process can continue and in our conversations with our distribution partners we definitely believe that our distribution business this coming quarter will improve. And that is driven by stabilized to slight improvement in the POS and inventory correction returning to more -- inventory activity returning to more normal where POS and POA needs to be in balance.

So our comments are all based on POS-POA balance going forward and thus we can see an improvement in our distribution business coming relatively quickly here. And I gave you some dollar numbers as well to help you understand where those numbers are coming from. But clearly if you look at a year ago, our distribution business was 43% of our total revenue. This quarter it was 40% of our total revenue. So you can clearly from that sense that the destocking process has occurred, is occurring.

Marco Rodriguez

So then it doesn't sound like really anything has really kind of changed in terms of your communications and the way you interact with your distribution partners. Is that fair?

Per-Olof Loof

No. I think we are a very distributor friendly organization. We have excellent relationships with our distribution partners and we have been working with them a lot of years and we pride ourselves of being a real good partner to them in all areas across the globe. We have made one change in how we approach this and we have given the regional directors or the area directors with presence across the globe more direct responsibility for the POS business. Meaning that we will make sure that what the people in the field is pushing is not the POA of this business but the POS. And of course that will drive our POA business as well.

Marco Rodriguez

Got you. And then I apologize if I missed this on your commentary, but your gross profit margin in the quarter came in lower sequentially, which was different obviously than your initial guidance. Was that just a volume issue? Was there something else there that I missed?

Per-Olof Loof

That was a volume issue. Only a volume issue. And you are going to see that returning again next quarter.

Marco Rodriguez

Got you. Okay. And then last quick question, just kind of coming back here to the antitrust issues. Obviously heard what your response was to the prior question. Just any sort of update as far as timing is concerned. Your best guess as far as when you might hear from some of those major countries?

Per-Olof Loof

I think we will hear from one major country very shortly and another major country within a month or so. So I think we believe that the current accruals that we are taking is based on a lot less guess work than maybe people would believe. So I think we feel that these accruals are correctly placed. And I don’t know -- we talked about that, but also in the Taiwanese case, that $18 million in fines will be paid out over time.

Operator

Your next question comes from [Paulina Staks with Argus].

Unidentified Analyst

I wanted to ask you to give us some more clarity on markets for tantalum capacitors and polymer versus [indiscernible]. Why you see a growth happening this year?

Per-Olof Loof

We see this the change in the tantalum business from MNO to polymer is of course happening and we see our polymer business growing and our MNO2 business declining slightly. And I think we have seen that over the past quarters. We think the MNO2 decline is somewhat stabilizing and the growth -- but the growth we will see will happen in our polymer business which now account for more than half of our tantalum business.

Unidentified Analyst

In the tantalum business, which areas are you targeting? Where do you see most prospects for your products?

Per-Olof Loof

I think the -- any power management solutions of course, where we play best. So anything that has to do with the cloud, anything that has to do with new applications in the automotive sector I think are areas where we are going to be very strong going forward.

Operator

Your next question is from Scott Russian with Liberty Mutual.

Scott Russian

Just a couple of housekeeping questions. The first is, I just wanted to verify what was the outstanding balance on the revolver as of the end of the quarter and what was your availability to draw on it?

Bill Lowe

Outstanding is the same amount that we actually had in the prior quarter. We didn’t use any of the revolver for the year. So about $38 million was outstanding during the quarter and about $22 million of availability.

Scott Russian

Okay. And in your guidance to flattish cash on a year-over-year basis, does that assume any pay down of the revolver or do you assume that that remains flat in Q4?

Bill Lowe

It actually does. It does assume some pay down of the revolver, we are working on how much that will be as we approach the end of the fiscal year. But, yes, we expect to pay down some of the revolver.

Operator

[Operator Instructions] Your next question is from Jacob Muller with AYM Capital.

Jacob Muller

As far as the NEC TOKIN transaction, now that you are contemplating just a few more months to deal with the outstanding regulatory issues, how long after that would it take for you to actually close on the merger?

Per-Olof Loof

I mean first we have a few more jurisdictions that have to report and we get the final judgments on that. And of course it's a little hard to predict how long that will take. We are seeing that happening sooner rather than later but it may take more than a couple of months. So I think as we get clarity, which is the word we have used, we have a clear path to making the merger happen. But for me to say more than I have said before that I think it is months rather than years. But exactly when that can happen will depend on what happens in the regulatory areas.

Jacob Muller

Do you foresee any scenario where it passes beyond the 2016 calendar year?

Per-Olof Loof

I certainly hope that we can close this in the calendar year.

Jacob Muller

Okay. And you gave guidance for next quarter. I don't know if you spoke about CapEx for the last quarter of the year?

Bill Lowe

We did. I said we thought that the full year will be somewhere between an $18 million to $21 million number and we were at an excess of $14 million year-to-date. So somewhere in that $4 million to $6 million range for the fourth fiscal quarter.

Jacob Muller

And do you see that range continuing for the foreseeable future as far as the ongoing CapEx?

Bill Lowe

We do. I mean we are planning to be in the same range next year.

Jacob Muller

So with that in mind, I mean cash flow for 2016, assuming restructuring doesn't rear its head again, should be substantially higher than 2015?

Bill Lowe

That’s correct. We had, as you recall, if you go back to at least to the first half of the fiscal year, we had substantial amount of restructuring expenses, severance expenses, moving cost of equipment etcetera that did absorb quite a bit of cash that will not repeat in the next fiscal year. So we do expect to built more cash next fiscal year.

Jacob Muller

When you look at usage of the free cash flow, what are your priorities as far as repurchasing debt perhaps at discount or stock at this level?

Bill Lowe

I won't say whether it's purchasing debt at discount as much as I think we need to be in a position, we would like to be in a position I think as we go into the next round of restructuring as a balance sheet to have less debt on our balance sheet. How we accomplish that is, of course, we will look at it at the time but the goal would be to have less debt than we have today.

Jacob Muller

Is there any reason at this depressed free cash flow multiple of stock that buying some stock back at these levels would not be considered an attractive opportunity?

Bill Lowe

You know there is a always a lot of discussion about whether buying back stock is the right thing to do and I think while we are at the level we are with our cash balance and with our debt balance and with the cost of that debt, it may or may not be to the company's best interest to do that. But everything is always on the table so I am not going to say the company won't but I am not going to call this a position where it's something that I think shareholders should count on either.

Operator

Your next question is from Ana Goshko with Bank of America.

Ana Goshko

Just on that last question. I think it set this question up very well. So I realize that there are some cash constraints, but given where the level of the bonds have been with the debt markets really being in disarray, has there been any thought of buying in some of the bonds below par to take out the discount and have that be accretive?

Bill Lowe

Again, we always have those discussions and it's a matter of looking at our cash and our cash flow. And I think since we haven't done it, I think you conclude that at the moment we concluded that it's better for us to build some cash. As we come out of a year where we had to have, it's fairly significant demands on our cash from restructuring to get out of that situation, built some cash, and then determine whether -- what's the best direction for the use of that cash that we have on the balance sheet. And I think we will determine that as we built some additional cash and take a look and see what's the best -- what creates the best value for the use of that cash. Whether it's buying back bonds or whether it's, to the previous questioners -- to Jacob's question -- is it stock, is it another investment. What creates the best value for the company for the use of that cash.

Per-Olof Loof

And also -- Ana, good morning, this is Per. I think also when you look at all of these things where of course we take into our calculus is our view of the upcoming anti-merger. So that always plays into all of these questions, how we should spend the cash we have.

Ana Goshko

Okay, great. And then just on that topic, assuming things fall into place on the regulatory front. Again with the disarray in the debt markets, is refinancing either of the current KEMET debt or the NEC TOKIN debt, is that sort of a condition precedent to being able to close? Or is there a way that you believe you can kind of structure a deal where you don't need the capital markets to close the deal?

Per-Olof Loof

We believe at this point that we have a play book and I have said that I can't go into the details of what the play book looks like. But clearly it is our view that we do not need the capital markets to take the next step in this process.

Operator

Your next question is from Matthew Sheerin with Stifel.

Matthew Sheerin

Just a quick follow up question. Just regarding the gross margin, which looks like you are guiding up somewhat on modest revenue growth. So trying to figure out how much is left in terms of the synergies and costs from the consolidation in the F&E business, given that you are at a lower revenue run rate. And then also in terms of any incremental improvements that you will see from the tantalum supply chain or other efforts.

Per-Olof Loof

I think we have said all along what our tantalum model is and what we need to -- we want to get our gross margins up to 25% level. And there is still stuff to do or stuff that will hit the bottom line coming into the F&E business. And we are seeing some additional revenue opportunities in F&E coming to fruition. The design activity is very intense, particularly in that space. So I think we are seeing a path in our F&E business to improve that gross margin to what we previously have been expecting. So there are more stuff that will hit the P&L, clearly. Some have already been implemented but it's not made its way to the bottom line as yet. And there are other activities that are being planned for the next couple of quarters that will also have a positive impact on our F&E business in particular. And I think the move from MNO2 to polymer is also a positive track for us, the polymer business is more profitable than the MNO2 business and therefore as we see the polymer business grow that’s going to have a positive effect on our bottom line.

Also we are now at little less than 70% of usage of our vertical integration process for the [indiscernible] that we need and we still believe we have at least another 10% points of activity in that area that will come to impact our bottom line as well.

Matthew Sheerin

That's helpful. Just in terms of that 25% number given these initiatives, is there a revenue run rate that you need? Is it going to be north of $185 million, $190 million? What's the ballpark there?

Per-Olof Loof

Well, clearly when we look at these projections, we need to look what is the new normal revenue rate that we are going to see given the FX situation in Europe and whatever we see in the market. And as you can probably tell, at these revenue levels, a, being profitable, b, having gross margin over 22% at these rates and the new actions coming, we believe that we can get to a 25% gross margin level with some revenue growth but not significant revenue growth.

Operator

There are no further questions.

Per-Olof Loof

All right. Thank you very much for being on the call and thank you for your interest in the company and we are looking forward to this quarter. We are looking forward to seeing some increases in the demand across the board and an improvement in our bottom line performance as well. And hopefully we will close out -- we believe we will close out the year strong and looking forward to our next fiscal when we hope many good things will happen to the company. So with that I wish you all a good day and thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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